Educating Homebuyers

Buying your first home is not as complicated as you think.

Before you go house hunting…

We suggest you visit one of our lending partners to find out exactly how much you are qualified to borrow. To get ready for that first visit to the lending partner, you should gather the information that will help the loan officer determine the maximum loan amount that will be available for your home purchase. Knowing how much you can borrow will not only make house-hunting a lot easier, it will also speed up the mortgage loan process.

Your loan qualification will depend on your personal financial condition: when you borrow money to buy a home, the lender wants to be sure that you (and your spouse, if you’re borrowing together) have the ability to pay back the loan over the repayment period. To ensure this, it will be necessary be able to show proof that you have sufficient income to meet the loan-payback requirements.

The following are among the things the lender will want to investigate:

1. Your Credit Rating: Most programs have a minimum credit score. The first thing the lender will want to check is your credit report and credit score. They’ll need your current and former home addresses and your Social Security numbers to acquire the report and score. The report lists consumer loans, credit cards and other credit-related activities that allow an assessment of your current outstanding debts and your payment history.

2. Proof of Employment: It is usually required that the borrower be able to prove sustained employment (or related education or training) for the past three years. If you and your spouse are applying together, that applies to both borrowers. Bring along a couple of pay stubs from the company where you’re employed. If your spouse will be a joint borrower, pay stubs from your spouse’s employer should be included.

3. Other Income: In addition to your monthly paycheck, you or your spouse may have other sources income; you may earn money on weekends or after hours as a part time contract employee, or work in a restaurant for tips only, or perform any number of extra income earning tasks. If you’re issued a Form 1099 for your earnings, that income will show up on the income tax forms discussed in the following section. If not, but you can document your earnings, it will be helpful to tell the lender about your outside jobs. Alimony, child support and SSI payments can be included.

4. Income Tax Forms: One of the easiest ways to verify income over a period of time is with copies of your Federal income tax forms (1040, 1040 EZ, or 1040A) together with copies of the W-2 Wage and Tax forms you received from your employer and/or your spouse’s employer. The lender will want to see tax forms for at least the past three years.

5. Divorce Decree: If either you or your spouse has been previously married, the loan officer may want to see a copy of the divorce decree.

6. Your Current Rent: It’s a good indication of what you can afford to pay each month for housing. The loan officer can calculate a home loan total based on the amount you pay in rent each month. It’s just an indication. All the other information must be considered to come up with the most accurate loan total.

As soon as the loan officer completes an analysis of your credit report and other information you’ve provided, a loan amount can be determined. Armed with that figure, you can start house hunting.

We suggest you work with a real estate agent. Contact a licensed agent at any of the brokerage firms in the area and ask that individual to help you find a home in your price range and in a general area that you prefer. The agent has access to information about available homes that doesn’t always show up in the newspaper or on the internet. Be sure that the agent you choose is representing you as a buyer and serving your best interests. If, instead, you drive by a house you like and call the name of the agent on the “For Sale” sign, be aware that the agent is representing the interests of the seller.

If you choose to go at it alone, be sure you have someone experienced in real estate to whom you can turn for advice.

Once you’ve found the home you want to purchase…

You’ll be asked to sign a purchase agreement. Be sure you read the purchase agreement carefully before you sign. Before signing, you should review it with the real estate agent who’s representing you, the loan officer, an attorney, or someone familiar with real estate transactions. A purchase agreement is a contract to which you are legally bound once you sign it, as is the seller. As your advisors will tell you, you can add conditions to the purchase agreement, such as an inspection by a licensed home inspector to make sure there are no hidden defects, or that certain appliances or window treatments remain. If the seller agrees, those conditions become a part of the contract.

The purchase agreement will usually stipulate a date by which the sale must be executed, so be sure that the loan officer can complete the loan processing and make the funds available by that date – the sale “closing.”

You’ll also need to arrange for the following:

Homeowners Insurance: It is required by the lender that when you take possession of your new home (which is the moment the sale has been closed) that it be fully insured and that the lender is named as a co-insured. An insurance agent can help you acquire homeowners insurance. Don’t be afraid to shop around for the best possible rates and coverage. Since we’re in a hurricane zone, it’s important to know the amount of the “named storm” deductible – the amount you’d have to pay toward any repairs before the insurance coverage would kick in. The named storm deductible can vary from company to company, so it’s a good idea to shop for coverage that’s best for you.

Flood Insurance: Depending on where the home you purchase is located, you may be required to purchase Flood Insurance as well. Your loan officer or your real estate agent will advise you in that regard. Flood insurance can also be arranged by your insurance agent.

Your lender will need to arrange:

An appraisal: Your mortgage lender will want to arrange an appraisal of the property to assure that the amount they are financing is commensurate with the true market value of the home you are purchasing. The cost of the appraisal may be included in the Closing Costs.

The Closing…

In most cases, it is up to you to choose the real estate attorney who will conduct the closing – the legal act of transferring ownership of the home from the seller to you, the buyer. Your lender or your real estate agent can provide you with a list of attorneys – often referred to as “Title” lawyers – who specialized in real estate transactions. If the seller is paying for the closing costs, the seller may choose the attorney to conduct the closing.

To protect both the buyer and the mortgage lender, a few important matters have to be examined by the attorney prior to the closing:

Title Examination: this is a process by which it is determined that the seller has clear and unencumbered title to the home and land on which it is situated. This may require a survey of the lot, depending on the location and number of previous owners.

Property Taxes: The attorney will also determine whether the seller is current with any property taxes due to the City-Parish government. He will also come up with a pro-rata amount for the year based on the date of the sale closing – the amount for which the seller is responsible and the amount for which you will be responsible for the year during which the sale occurred. Those amounts will be itemized in the final closing settlement costs (see closing costs below).

Termite Certificate: It is required by law that the seller provide a certificate from a licensed termite control/extermination company such as Terminix or Orkin that states that the home is free of termites.

Down Payment: A down payment – usually a percentage of the purchase price – may or may not be required, depending on the loan program you and loan officer decide is best for you. If a down payment is required, your loan officer will explain how that amount can be arranged.

Closing Costs: Before the closing takes place, you will be provided with a “Good Faith Estimate” of the costs associated with the closing – the actual transfer of the title from the seller to you. Oftentimes a seller may agree to pay some or all of the closing costs.

You should review all of the closing costs and discuss payment arrangements or options with your realtor and your loan officer.

Costs that are often charged and itemized include:

Discount Points or Origination Fee

Processing Fee

Title Search

Appraisal Fee

Pro-Rata Property Taxes

Title Insurance

Filing Fee (Clerk of Court charge to record your mortgage)

At the actual closing, the lending officer or a representative from the lender will be present to provide a check to the seller for the purchase price of the home, less any unpaid pro-rata property taxes or other fees and expenses the seller agrees to pay. Once the act of sale is executed and the Title Attorney has filed it with the Clerk of Court, your new home is yours!

Other things to think about…

Property Taxes/Escrow: As soon as your home purchase is completed and recorded with the office of the Parish Clerk of Court, the sale information will then be provided to the Parish Assessor’s office. The sale price will then be used to determine your property tax assessment – usually based on the sale price – which means that if you paid more than the seller did when he first bought the house, your property taxes may increase the year after you move in. You can find out how your property taxes will be calculated by visiting your Parish Assessor's website. Remember, too, that property taxes vary from one part of the parish to another, usually due to taxes for fire protection or other voter-approved tax initiatives that may affect just one particular section of the parish.

Once the Parish Assessor’s office has determined your property tax, you will be notified, as will the lender. The annual property tax can be divided by 12 and that amount can be added to your monthly mortgage payment and saved for you in what is called an escrow account. At the end of each year, the company that’s servicing your loan will send a check for the entire amount to the assessor.

Insurance/Escrow: The same procedure can be followed for your homeowners insurance. The annual premium can be divided into 12 monthly installments that will be added to your monthly mortgage payment. That monthly amount will be saved for you in another escrow account and paid in its entirety to the insurance company when premium payment is due.

Termite Protection: It is recommended that you continue the Termite protection program for your home. Because termites are so common in our area, those plans will insure that if you ever have termite damage, the damage will be repaired by the company with which you’ve contracted. Be sure that the program you choose covers both subterranean and Formosan termite incursions. Another reason to continue protection is to be able to provide a certificate in the event you ever sell your home.

If you have any other questions, don’t hesitate to call a qualified real estate agent or any of the mortgage lenders. We all want to do all that we can you help you buy your very first home.

Also…

There are several organizations that provide a free (or for very little cost) first-time homebuyer training class that brings in many of the individuals – real estate agents, lending officials, insurance agents, etc. – discussed above to make presentations and answer questions. Many of those presenters also offer discounts to their “graduates” for some of the services they offer. One such organization that is a partner of the CAFA is Mid-City Redevelopment Alliance. Visit Midcity Redevelopment.